October 27, 2013 6:57 pm
Yet, for all the criticism, certain aspects of China’s cautious approach to economic reforms, which is likely to continue, might actually prove an object lesson to other countries.
Consider the proposal to eliminate the ceiling on interest rates paid on bank deposits. The ceiling has stifled competition among lenders, resulting in households receiving minuscule real returns on their deposits for much of the past decade.
Removing the ceiling would have its dangers. Weaker, poorly regulated banks might offer higher rates to compete for deposits, make riskier loans and set themselves up for failure. An explicit deposit insurance system, rather than the implicit state guarantee that now covers all deposits, would impose market discipline.
Since such a system would take time to put in place, the government has chipped away at the ceiling by allowing the proliferation of other saving products with higher returns. This approach has its own risks but helps catalyse interest rate reforms.
Small, indirect changes, even if inefficient, elicit less opposition, pose fewer risks and make course corrections easier. A big-bang approach might harm the cause of reform in the long term by inviting stronger opposition from those keen to maintain the status quo.
Beijing has proved effective at creating narratives that build broad support and provide a framework for communicating the logic and desirability of individual reforms.
Given its under-developed financial markets, capital account liberalisation would be premature. But this objective highlights areas where reforms would be in China’s own interest: broader and better regulated financial markets, as well as a more flexible exchange rate.
This year, Beijing announced a plan to reduce inequality. This would be a dubious policy goal if it emphasised redistributive policies. In fact, the proposals are exactly the reforms needed – financial market liberalisation, reform of state-owned enterprises and freer labour mobility. All are worthy in themselves but the narrative helped emphasise that the benefits would be widespread rather than accruing to the select few.
Narratives must be translated into action. China does not have the luxury to postpone all reforms until the conditions are ripe. Its leadership may have to take greater risks to advance much-needed steps. But critics should appreciate that Beijing’s approach might reflect its economic and political savviness rather than a lack of commitment.
The writer is a professor at Cornell University, a senior fellow at the Brookings Institution and a former head of the IMF’s China division